All Forum Posts by: Vitaliy Volpov

Hey Taylor!

First congratulations on taking your real estate education seriously and putting yourself out there by posting on the BP forums. It can be an intimidating thing to do when you are just starting out and asking foundational questions.

Second, please keep in mind that what I’m going to share is my opinion and others may disagree. But, my answers are based on my actual experience being a real estate investor for the last 12+ years.

I am 41 years old and currently own 160 units. The vast majority of these units I purchased using private financing with $0 out of pocket. 

To answer the first big question in your post — single family vs multi-family — I am firmly in the multi-family camp. I personally have had amazing success with properties which are between 2 and 12 units, which most people would call “small multi-family.”

There are many advantages that small multi-family properties have over single family properties in my opinion. But there are also some disadvantages. And I also think that the inventory in your market plays a large role in deciding what property type makes the most sense.

In my market, there is a large abundance of the small multi-family properties, especially the 2-4 unit properties. Additionally, in my market, a lot of these properties are located in areas where price-to-rent ratios are extremely favorable. For example, it is not unusual for me and my business partner to buy 4-unit buildings for about $250k and be able to rent them out for $4,000+/mo. 

By the same token, single family properties in the same areas, at best, might sell for $100k and rent for $1500/mo. Most of the time, you’re looking at prices in the $150k+ range to get that kind of rent.

Additionally, the economies of scale really do come into play when it comes to comparing single family vs. multifamily properties. Our 8-unit buildings have one roof, one foundation, and one structure to take care of. If I were to get 8 separate single family homes, I would 8 roofs, 8 foundations, and 8 structures. The cost to maintain them probably wouldn’t be exactly 8x as compared to the single 8-unit, but it sure as hell isn’t a 1-to-1 ratio either. 

Additionally, when comparing whether to build a single family portfolio or a comparable multi-family portfolio, you should also keep in mind the transactional costs involved. Each closing, whether multi-family or single family, is going to have some of the same costs: title insurance, attorney fees, inspection fees, appraisal fees, fees associated with financing, etc. To continue with the 8-unit example, you again end up spending many multiples of these costs to build a comparable portfolio of single family properties.

Another disadvantage of single family properties is that there is only one tenant per building and if they stop paying or if there is a vacancy, the entire cost of that property is on you and your wallet until you can fill that vacancy and get the rent coming in again. With a multi-family property, it is very unlikely that all of your units become vacant or non-paying at the same time. So, often times even if 1 or 2 of the units in the building are not generating any rent, the remaining rents are still enough to pay for all of your property’s expenses and you don’t have to come out of pocket to cover them. This obviously is not the case with single family properties.

With all of this said, single family properties do have some significant advantages over multifamily properties. One, they will likely appreciate more quickly than multifamily properties. Two, the tenants will likely stay longer and there will be less turnover, which mean some savings on turnover costs. Three, the tenants will be easier to manage because there won’t be any bickering or disputes between them and other tenants in the building which is common with multifamily properties. 

All things considered, I still believe that multifamily properties edge out single family properties. The only exception might be if you plan to and if your market supports short term rentals. In which case, the single family properties might rival and even exceed income potential of comparably priced multi-family properties. However, short term rentals are much less passive than long term rentals and are essentially a hospitality business, which is in and of itself required a whole additional layer of knowledge and expertise.

With regard to your question about private lenders, it’s important to draw a distinction in terminology between “private” and “hard money.” Hard money lenders are much more like banks and come with many restrictions, requirements, due diligence, fees, etc. Hard money loans will almost certainly not cover 100% of the property’s purchase price and will require a chunky amount down (eg 20-30%) from you. They will also often carry very expensive interest rates and have other fees tacked on. They often also require appraisals and additional hurtles. On the other hand, true private lenders are not professional lenders and hedge fund type lenders (which is what hard money lenders are), but instead are regular people in your circle and sphere of influence. These people are not necessarily in the business of lending money and loans from them can be negotiated in any number of ways. Most of the private lenders we deal with don’t require appraisals, never set foot on any of the properties they finance for us and, best of all, often finance 100% of the purchase price and renovations. These are entirely relationship-based and do take time and energy to cultivate but are very lucrative once you cultivate them. These people can be relatives, friends, coworkers, friends of friends, and business associates. The key is that they need to know, like, and trust you. There is a lot more I could say about private lenders and how to find them, but this reply is already extremely long, so I’ll just leave it at that. Happy to chat further if you want to reach out to me with a DM.

The last thing I would tell you is that, I started my real estate journey with a house hack of a 2-family property in 2011 using bank financing. Not only is there nothing wrong with taking this approach, but I actually think this is the best way to start and the way that 99% of new investors should start their investing journey.

You get to kill multiple birds with one stone by following the house hacking strategy. You get to live in a property you own for free or almost free, while learning the ropes of being a landlord and you get very very favorable financing, where you don’t have to worry about finding private lenders or getting into any complicated or exotic investment strategies on your first deal. You do need to have steady employment, decent credit, and not be drowning in debt. But, I don’t think that should be a very high bar for you especially if you are already studying and researching this at 18 years old and you don’t plan to buy anything until 2-3 years from now at the earliest. You can very comfortably and at your own pace set yourself up for a very stable start by strategically positioning yourself to be able to buy a property this way if you start preparing now.

I hope this was helpful! Let me know if you have any follow up questions or want to connect more. Good luck!

Vitaliy

Hi Danielle!

Yes, that makes sense. Good luck! 👍

Vitaliy

Okay guys. You convinced me! I'm going to move some money from Ally Bank to Wealthfront. 5% sounds a lot better than 4.25%!

Hey @Al Seward,

My personal preference has always been for multi-family rather than single family house hacks. The exception to that for me would be a single family with a mother-in-law suite with its own entrance or an ADU at the property. A basement conversion into an apartment could work as well. But, as some others have said, a basement conversion comes with numerous challenges and obstacles (permit issue, zoning & planning approval, significant amount and cost of construction, lack of natural light). My business partner and I have renovated numerous properties using the BRRRR strategy and one thing I can tell you with 100% certainty is that no construction project ever comes under the initial budget. There are always unexpected issues that come up. As a new investor, I think it's much more risky for you to buy a property which is going to need a major remodel like adding an entire unit to the existing footprint rather than just buying a property that already has multiple units there.

I don't know if you have construction experience.  If you do, maybe you could aleviate some of those concerns.  But, it's still going to involve a ton of your own time, energy, and labor.  In my opinion, it is just not the most efficient way to allocate your resources.  As others have said, definitely don't buy in a bad area or sacrifice safety just to get into a multi-family house hack.  But, at the same time, there have to be areas near you which are not dangerous and which still do have 2, 3, and 4-unit properties.  

My first rental property was a duplex in a good area and a good school district.  It cost me more than other two family properties I considered in less desireable areas.  But, it was 100% the right decision looking back on it.  I was always able to find great tenants, never had any headaches with management, and the property appreciated much better compared with the other duplexes I considered.  I moved out of the unit I was occupying after about 4 years and rented it to a tenant.  I've been running it as a non-owner occupied rental for 8 years now.  Cash flow is not amazing, but I still have no headaches with this property and I don't have any plans to sell it any time soon. 

Hopefully, this helps you in your decision-making.  Obviously, at the end of the day, you need to do what is right for you.  Good luck!

Vitaliy

Hey Danielle!

Congratulations on the first house hack! Others have already given you good advice on the DIY vs. contracting out and the flooring questions. My question and encouragement to you is about the big picture. I am curious about your plan for renting part of this house? Charlotte is obviously an attractive destination. Are you planning to rent the rooms on airbnb or to long-term roommates? Or is your "house hack" plan to do a live-in flip or to rent the whole house out after you live there for a while and then move out and on to a second property? 

I know you are very excited, as well you should be! But, I would encourage you to also think strategically about how to maximize the "hack" part of the house hacking strategy. It's fun to remodel the house and make it as nice as possible. But, at the end of the day, you also need to make money and offset the costs through tenants.

Vitaliy

Nice @Benjamin Sulka!

I'm gonna check out Wealthfront too! Thanks for the tip 👍

Vitaliy

Hey @Account Closed,

I think Andrew's advice is very sound. I would add that you should speak with your attorney in addition to the realtor with regard to the current contract. While your realtor usually does the initial negotating and filling out the contract, it's the attorney's job to provide you with legal advice.

Alecia's points are also well-taken. I would also add this consideration to help you compare the two options: which property will attract better tenants who will be easier for you to manage?  A lot of new investors and house hackers don't take this intangible into consideration when they are looking for their first or next property. The nicer the area and the property, the more likely it is that it will attract more responsible and conscientious tenants. Knowing that you will have to live next to your tenants for a significant period of time, this becomes an even more important consideration in my opinion.

When I bought my first house hack, I intentionally opted for a two-family in a good area and good school district (choosing it over 3- and 4-units in less desireable areas) because I wanted to ease into becoming a landlord and because it was important for me to be comfortable with where I lived. My cash flow after I moved out of it a few years later is no-where near as good as any of my non-owner occupied rental property purchases, but I spend almost no time managing that property, which I still keep in my portfolio. I think there are literally months that go by that I never have to deal with any issue at the property. My tenants take care of the lawn mowing and snow removal, never cause any disturbances or have any arguments with each other or the neighbors, and always pay their rent on time. 

The mortgage continues to be paid down by them and the property continues to appreciate over time with little to no involvement on my part. To me, there is a lot of value in that. Just some food for thought...

Vitaliy

I agree with @Christian Ehlers and @Andrew Postell! Don't use a percentage for closing costs. There are way too many variables at play that will determine what your closing costs will be. 

If you have a specific property in mind, you can get a pretty accurate estimate of what the closing costs will be at a given price point. Your agent can get the info on property taxes and likely price point. Your lender will be your best source for information on origination fees, appraisal fees, mortgage points (if any), whether and how much you need to pay in pre-paid property taxes and insurance (your insurance agent should be able to quote how much your policy will be which you can give to your lender to get the most accurate number for this). Also, your lawyer/title company can help you with some of the closing costs you can expect to incur, such as title insurance, transfer taxes (if any), recording fees, attorney fee, etc. 

If you speak to these professionals on your team, you can get a pretty accurate estimate of what the closing costs are going to come to. If you don't yet know who will fill these roles for you, I would suggest spending some time and effort to find them now before you start hunting for properties and making offers. It will make the process less stressful. 

Hope this helps!

Vitaliy

Hey @Will Bazile,

This is an awesome question! I would do exactly what @Alecia Loveless isuggested for where to keep the money -- a high yield FDIC insured savings account to make sure that your money is safe and that you get as much of an ROI on it while you're building it up. I have been using Ally Bank for years to hold my cash reserves. Right now, their savings account interest rate is at 4.25%. The online interface is user friendly and you can get access to your money fairly quickly if you need it. I also have funds in a CD with them, which pays 5.10% right now, but there is a penalty for early withdrawal.

Alecia, which bank is offering 5.5%? I'd be interested in checking them out myself.

As far as your other questions Will, I think your goal should be to save at least 10% of the total target purchase price if you are going to be using FHA financing and 15% if you are going to go conventional to finance your house hack. This will cover your minimum down payment (3.5% for FHA, 5% for conventional) plus will allow you to cover your closing costs (if a seller concession/contribution is not possible on the deal you and your agent negotiate), plus it should leave you with some additional funds left as reserves in case unexpected repairs come up after the closing.

As far as how much you should be saving each month, you should try to save as much as possible. Yes, definitely max out your employer match for 401k and max out your Roth IRA. After that, bank anything over and above your regular living costs and expenses.

When I was saving for my first house hack, I was pretty extreme with it. I basically just covered all of my fixed debt payments and living necessities and saved everything else. I'm not gonna lie, it did help a lot that I had the option of living at home for a year after I started working. So, I did not have the rent payment to worry about. But, I did have to pay about $1,000 per month toward student loans, had a $300 pre month car payment, plus paying for food and clothing. I did not spend any money on any luxuries or vacations and it took me about a year to save enough for a down payment and closing costs on a $230,000 duplex.  

I'm sure you're pretty excited about starting this new chapter in your life as well you should be! Nine years after I bought my first house hack (which was the gateway to all of my subsequent real estate investments), I was able to walk away from my 6-figure corporate law firm job and work and live on my own terms. If I did not take that first risk and take that initiative to get started, I would still be sitting at my desk in the office, working 10-hour days like so many of my colleagues and classmates still do to this day!

Vitaliy

Hey @Rafael R.,

I have some follow-up questions about the numbers in your spreadsheet. I know you're asking about whether it makes sense buying it at $850k and you're basing the calculations in the spreadsheet on that being the purchase price. But, I also see it says in the spreadsheet that the "fair market value" of this property is $950k. Where is the extra $100k of value coming from?

You also reference a mortgage interest rate of 5.2%. Is that based on an actual mortgage quote from a lender? If so, who's the lender, because that's an awesome rate?! Everything I'm seeing online right now is in the 7.25+% range. Also, I noticed that you're using a 25-year amortization in the spreadsheet. Is there a reason you're not going with a 30-year amortization? A 30-year amortization would decrease your monthly mortgage expense a little bit (though the higher interest rate will also increase it, so you'd have to factor those things to see if they make a difference). 

Aside from the questions above, and assuming the final results you mentioned, I think the main question is when you say you want it to be a "long term investment" do you mean that you will live in this property long-term?  If not, and if your plan is to house hack it for a few years and then move out and keep it as a rental, I'm not sure it makes sense as an investment. The purchase is way too high relative to the rents (assuming $2500/mo/unit is market rent). The monthly mortgage cost under your current calculations is going to be $4,744. The total rents are $5,000. That means that there is just no money left over to cover expenses, even if you account for some rent appreciation over time. 

At minimum, you should budget 30% of gross rents for vacancy, repairs, maintenance, and capital expenditures.  And that's on top of the fixed expenses like taxes, insurance, water/sewer/garbage, etc.  So, from a long-term investment standpoint, this seems to be a significantly cash-flow negative deal. 

With all of that said, if the plan is for this to be a "forever home" for you and your family, that obviously makes a big difference. If you plan to live in this property for as long as you own it, then it might not be a bad deal because it will allow you to live in a good area and a desireable school district and you'll be able to offset the expensive mortgage cost with rent that you get from your tenant.  

Vitaliy